Supply-side squabbles.

SUPPLY-SIDE SQUABBLES

THE THING about supply-siders is that they don't get along. Jammed into their little movement is a dazzling array of zealots, geniuses, egotists, and malcontents. Robert Mundell, the intellectual godfather of the movement, is a longhaired professor with a passion for painting, eccentricity, and intellectual purity. Jude Wanniski, the so-called bomb-thrower, reported to his first job with Dow Jones & Company in a silver Buick Riviera convertible, wearing mirrored sunglasses and a gold lame sports coat, with his wife, a former Las Vegas showgirl, in tow. Arthur Laffer is as charming and dazzling a man as you'd ever want to meet, but he's been known to lash out at his allies, most recently Jack Kemp. Paul Craig Roberts, probably not a man who goes around reciting Stevie Wonder lyrics, relates to people on "a purely intellectual basis," according to his closest friends. He is critical, downbeat, and driven. Supplement that group with George Gilder, Alan Reynolds, Norman Ture, Irving Kristol, Warren Brookes, Jack Kemp, Lew Lehrman, Robert Bartley, and others. "You are talking about people with egos, and people with egos don't get along with one another," says economic columnist Brookes. "But it takes a big ego to be a political figure, a thinker, and a leader."

It also takes competitive fire. These supply-siders are like intellectual entrepreneurs, competing for glory and influence, all the while acknowledging that the success of each creates more demand for the writings of the group.

"Basically, everyone thinks he invented supply side, and he hates all the others who think they were the one," says economic consultant and supply-side political ally John Rutledge. A lot of people do say they discovered the ideas. Robert Mundell and Art Laffer make a pretty good case, but then so does Philip Bradley, a Harvard economist nobody has heard of, who was writing supply-side-like monographs in 1943.

What Mundell and Laffer have that loners like Bradley did not have is the press. "I almost think that Art Laffer consciously modeled himself of Keynes's career," says supply-side journalist Peter Brimelow, a senior editor at Forbes. "People forget that Keynes himself was as much a journalist as anything else."

But Laffer's cause might still be unknown if it hadn't been adopted by an even more gifted journalist. Jude Wanniski. "Wanniski really seized the different elements of supply side and put them together, in much the same way Procter and Gamble packages a new kind of toothpaste," sayd Ned Scharff, author of Worldly Power: The Making of the Wall Street Journal. "Had that not happened there never would have been a supply-side movement." Wanniski himself talks about spending hours and hours at a New York bar arbitrating a series of debates between Mundell and Laffer on the shape of supply-side economics.

Wanniski did most of his work at the Wall Street Journal under the tutelage of another journalist/intellectual, Robert Bartley. Bartley encourages his individual writers to serve as point men on specific issues. Their job is to poke at controversial and unexplored bushes to see what comes out. Wanniski poked around the supply-side bush and eventually persuaded Bartley himself that the theories were genuine.

Supply side is largely a journalists' movement. "It is comparable to the 1848 revolution in France where all the major political parties were associated with magazines," says Brimelow. As I was interviewing people for this article, I was shocked to find a near consensus around the proposition that journalists and private consultants have more freedom than academics. "I've spent some years in the universities," says Rutledge, "and there what you do is 99.9 per cent determined by the editors of the major economic journals. If the five biggest economic journals don't want to publish work in a given field, you might as well pack up your tent."

"There's more of a danger of academics' following the crowd with the intent to do what's fashionable," says Northwestern's distinguished professor Jacob Eisner. "What is not fashionable doesn't get you very far."

In private consulting or in journalism, on the other hand, there is no small group of journal editors or elite department heads to determine what a person can publish. Editors rarely censor journalists on fine economic points. In consulting, there are so many thousands of potential clients in the world that a consultant can pretty much say what he wants, and, as long as it yields results, he can still be assured of a niche in the marketplace.

So it was journalists, with the analytic support of private consultants, who were free to substantiate the original Mundellian supply-side insights. Characteristically, the movement's most recognizable feature is not an economic theorum, but a journalistic device--the Laffer curve. Jude Wanniski seized upon the Laffer curve as an easy way to communicate the fundamentals of incentive-based fiscal policies. The curve itself is about as innovative and remarkable as the sundial. Montesquieu knew that at certain points you could lower tax rates and increase revenues, as did Adam Smith, as did John Maynard Keynes. It is, as Herb Stein says, not true, but a truism.

Nevertheless, is struck short-memoried journalists and politicos with the novelty of revelation. Jeff BEll, who helped put supply side on the political map with his successful 1978 primary campaign against New Jersey Senator Clifford Case, says, "The Laffer curve was an important teaching tool for the electorate. It got us off the hook of having to propose a horrible list of spending cuts. In the stage before supply side we felt that in order to shrink the take of government we had to have big spending cuts to be 'responsible.' The Laffer curve got us beyond that pitfall."

The Laffer curve, with its suggestion of having your cake and eating it too (or of having your lunch for free), is an extremely optimistic concept. That optimism and the self-assurance with which supply-siders offer their policy proposals have become supply side's stylistic hallmark. That glib style angers many, including many academic supply-siders. They concede the value of optimism and self-confidence, but they are more concerned with what they say the movement lacks: economic rigor.

Norman Ture, the supply-sider who was Under Secretary of the Treasury for Tax and Economic Affairs during the first Reagan term, says, "Public attention has been focused upon supply side in terms of the so-called Laffer Curve. The Laffer curve is certainly not a fundamental notion in supply-side economics. It is an interesting arithmetical observation with extraordinarily limited applicability in the real world. If that's what supply-side economics had to live or die by, it would have long ago had an inglorious decease."

Paul Craig Roberts, who was a supply-side mover and shaker in Congress in the Seventies and then under Ture in the Administration during the early Eighties, wrote in a recent NATIONAL REVIEW article ("The Great Tax Reform Debate," June 6):

After the rhetorical debacles supply-siders have suffered in the past few years, the last thing the supply side needs is more mysticism on the part of those of its supporters who assert the primacy of psychology over economic analysis. The small cadre of journalists and newsletter writers who have set themselves up as the high-priest interpreters of supply-side economics make it difficult for economists who are held to professional standards to be associated with the movement. Somehow a school of economic thought that has no economists in it seems unpromising.

Ture and Roberts don't have much respect for their journalist allies. Ture on George Gilder: "He ought to sit down some day and get straightened out. The piece he did in NATIONAL REVIEW and the piece he did in the Wall Street Journal [on tax reform] are just utter fantasies. His problem is that he doesn't understand the rudimentary economics of supply side." And on Jude WAnniski: "Jude is such a flamboyant talker. I have never been convinced that he understood any of it. Some of the stuff he's produced has persuaded me that he is very much at sea."

Where the polemicists have had great impact, Ture and Roberts say, is on the academic community, where their "rhetorical excesses" have discredited the movement. The romance and sensationalism of the journalists ghettoized supply side, they say, giving the impression that supply-siders disdained the standard practices of academic economists.

Academics don't disguise their contempt for the supply-side movement, often dismissing it as economic laetrile. "I don't think there are any supply-siders that have much standing in the academic community," sayd Northwestern's Eisner, who typifies academic reaction. "They offered a curious kind of cover for things people wanted to do," he continues, explaining their policy impact. "There was a great desire to cut taxes in order to bring down the role of government. The supply-siders offered a curious rationale. Also, they offered a cover, I think rather reprehensibly, to people who are simply out to save taxes."

REACTIONS IN government circles are scracely more sympathetic. There are two hundred economists in the Congressional Budget Office. Hundreds more are on the two budget committees and on the staffs of the fiscally influential congressmen. In the Administration--at OMB, at Treasury, at State--there are hundreds more. Of those hundreds or thousands you could count the number of self-proclaimed supply-siders without taking your shoes off. Paul Craig Roberts insists that the movement has been discredited in the eyes of the policymakers by the polemicists, just as it was for the academics. Roberts's book The Supply-Side Revolution contains episode after episode in which he claims supply-side journalists outside the halls of power interfered with the delicate back-room maneuverings that take place in the budget committees and in the Administration. If you can't persuade the people who have the power, Roberts argues, all the publicity in the world won't do you any good.

Though they often disagree with Roberts and Ture, Mundell and Laffer echo the concern for economic integrity. Neither Mundell nor Laffer is particularly happy about the supply-side journalists' tendency to ridicule the economic community. "I've never been anti-establishment in any way, shape, or form," Laffer told me. "In the beginning stages," Laffer recalls, "there weren't too many establishment people who would associate themselves with someone like me. The groups I had come around me were basically malcontents and deviates. Basically anti-establishment ... Jude Wanniski I would put exactly in that category."

Laffer faults Wanniski for opening up the movement to unreliables. "Jude is willing to back a friend no matter what the friend does on issues," he said. "Jude was always looking to aggrandize the movement. He got a lot of winners, but he also got a lot of losers, who have become major problems."

Meanwhile, Bob Mundell, who, as editor of the Journal of Political Economy, was in the very belly of prestige economics, is said to have excommunicated all but a handful of supply-siders from the movement for deviationism.

Supply-side journalist Warren Brookes, whose columns reflect a profound respect for "the numbers," is not hostile to the polemicists. But he acknowledges that for many supply-siders, notably George Gilder, idealism has overtaken economics. In many ways, Brookes's version of supply side is very close to Gilder's but he notes that "George tends to be somewhat romantic because George is not an economist. George is a romantically gifted polemicist. He has seized upon supply-side economics because it emphasized the individual... One of the reasons I don't do what George does is that I don't like to write something unless I can prove it. You won't find me philosophizing on issues if I haven't done enough hard-number analysis."

The danger, of course, is that the polemicists, with their limited expertise, will turn into economic versions of political pilgrims, the naifs who spent a week or two in Stalin's Russia or Castro's Cuba and came back reporting a workers' paradise. They will sacrifice reality to their ideals, they will mix nonsense with doctrine, they will alienate competent professionals, they will make fools of themselves and their movement, and they will behave as if establishment economists have forfeited their right to have a say in the fiscal policy of this country. These are the fears that plague Roberts and Ture, and, to a lesser extent, Laffer and Mundell.

"What I find really frustrating," Roberts says of non-economist supply-siders, "is the idea that facts, professionals, and science just don't matter. This is absurd. This is a form of egotism that is unimaginable... Gilder took the position that supply-side economics built on facts and analysis implied insufficient faith. Well, they're going to have to call it supply-side religion. The economists are just going to walk away."

One way to understand the trajectory of the supply-side movement is to read a book published in 1962 by Thomas Kuhn: The Structure of Scientific Revolutions. In that short essay Kuhn argues that science has moved forward from one revolution to the next, not along a single evolutionary learning process.

Most Scientists, he writes, are narrow broom-pushers, people who confine their work to the conceptual framework, or paradigm, they were taught in graduate school. For the sake of scientific rigor, they are trained to think in small steps, with equivocations marking each advance. "We often hear," Kuhn writes,

that [scientific advances] are found by examining measurements undertaken for their own sake, and without theoretical commitment. But history offers no support for so excessively Baconian a method... In fact, so general and close is the relationship between qualitative paradigm and quantitative law that, since Galileo, such laws have often been correctly guessed with the aid of a paradigm years before apparatus could be designed for their experimental determination.

In other words, science moves foward when some rare, semi-responsible genius comes up with a wholly new way of approaching a field. The professionals in that field at first reject that notion. Then they suffer a crisis in confidence, as their own explanations fail. Then, slowly, in their particularist fashion, they adopt bits of the new paradigm until, through experimentation, they confirm the principles that the mad visionary asserted theoretically decades before. Once that is accomplished, the new paradigm is accepted.

Adam Smith provided economics with its first paradigm in 1776, overturning medieval prejudices about "just wages" and the evils of charging interest on loans. Because Smith offered a comprehensive, rogorous way to view the marketplace, today's economists don't have the "Am I a scientist?" insecurities that plague other social scientists.

Ture and Roberts seem to be pretty satisfied with Smith's paradigm as it is now understood. "People are beginning to understand that supply side doesn't warrant being called a separate school of thought," Ture says. "I call myself a supply-sider just for convenience. I'd rather be called something else. I haven't come up with an equally facile phrase."

Supply side's contribution, Ture argues, is that it shows how price theory applies to modern institutions: "The distinguishing attribute of supply side," he says, "is this: The first order effect of any government action is on relative prices. Those changes in relative prices result in changes in the way people allocate their resources. The consequence of that may be a change in the aggregate income [i.e., the wealth produced by a society]. If there is a change in aggregate income as a second order effect, it is likely to be powerful."

In other words government actions--lowering investment tax rates, for instance--alter the relative attractions of various activities; in this case, reducing the cost of investing relative to the cost of buying a Porsche, because lower taxes let you keep more of the rewards of your investment.

This view doesn't involve any dramatic paradigm shift. If Ture and Roberts had been the major spokesmen for supply side, they would have upset only hard-core Keynesians, and supply side would not have been scorned as it is today.

But Ture and Roberts do not lead the movement: By their own testimony if they had there wouldn't have been a movement. For all that the academics deride him, Jude Wanniski has been far more influential. On a theoretical level, Wanniski's version of supply side was a radical break with at least the recent past. With its emphasis on microeconomics and its faith in the efficiency of markets, Wanniski's book, The Way the World Works, the first important supply-side treatise, tried to restore the supremacy of Smith's paradigm. For Wanniski, modern attempts--whether Keynesian or monetarist--to stimulate or even regulate the economy by manipulating the quantity or value of money (aggregate demand to Keynes) require us to believe in the ignorance or irrationality of the individuals who make up the market. (Keynesians, for instance, advocate inflating the dollar during a recession, because they believe that, for a while at least, workers will thus be earning cheaper dollars for the same work, producing more for less, consequently increasing exports and causing the economy to grow.)

With Smith, Wanniski denies that individuals can easily be tricked into acting against their own self-interest in order to serve the general good. Therefore, like Smith, he argues that the essential goal is to foster genuine, rather than illusory, incentives for hard work and productivity. Thus the emphasis on low tax and tariff rates and other incentives. Wanniski wrote in Business Week in 1984 that "supply-side economics is simply nineteenth-century classical theory updated to cope with modern central banking and progressive tax systems." Because Wanniski saw himself as the restorer of the lapsed faith, Robert Bartley could call supply side "the lost continent of economics."

Wanniski's approach was necessarily less quantitative and more philosophical than that of most contemporary economists. In an economic theory that emphasizes the average effect of individual incentives, human nature plays a somewhat more important part than do statistical representations of the economy in gross. Many, perhaps most, supply-siders would argue that under the influence of Keynesianism and its endlessly complex and ultimately useless econometric models, economic broom-pushers drifted away from an appreciation of the true sources of wealth and the fundamental principles of the classical paradigm. "There was a peculiar moment in academic discourse in the late Seventies which we now forget because of the Reagan Revolution," says Peter Brimelow. "People really lost sight of elementary things about supply and demand."

Some supply-siders, notably Gilder and Brookes, push the tendency to think about economics philosophically even further, to the point of overthrowing Smith's paradigm rather than restoring it. Supply side derives its name from Say's Law, "Supply creates its own demand," formulated by the eighteenth-century French economist Jean Baptiste Say. For nearly all supply-siders, accepting Say's Law means, at a minimum, rejecting the Keynesian notion that demand (which Keynes equated with money) needs to be managed. For Say demand is a function of human nature and is essentially infinite. Human beings will take whatever they can get. But for many supply-siders Say and his law mean somewhat more than that; Say is a symbol for an approach to economics that makes man the master of the market rather than its unknowing helpmate.

Over the past two centuries, Warren Brookes notes in The Economy in Mind, Western economics has been divided over two views of wealth. The view of mainstream contemporary macro-economics, as well as of Malthus and Marx, is that the source of wealth is physical: money, structures, natural resources, capital: in short, finite things. The opposing view, which Brookes dates back to Say, is that the source of wealth is metaphysical, comprised of ideas, imagination, accumulated knowledge, ambition, creative drive, and other non-quantifiable human attributes. Wealth depends ultimately upon the inspiration that perceives a need (that is, senses the shape of demand more accurately) and transforms some previously useless or less valuable resource into the fulfillment of that need. Brookes quotes St. Paul: "Through faith we understand the worlds were framed by the Word of God, so that things which are seen were not made of the things that do appear."

THE RADICAL, or metaphysical, supply-siders hold to Say's view with a vengeance. For them wealth is largely determined by a man's state of mind. Men are not fungible. Two people starting with equal resources, and even more importantly with equal incentives, are not equally wealthy because one of these people may be willing to work 16 hours a day while the other is not; one may be willing to stake all his wealth and reputation on his own ideas and ability while the other may not; one of them may invent a new process or a new product while the other will not.

It is on this point that Gilder argues that supply side creates a new paradigm rather than restores Smith's. At the core of Smith's work Gilder finds a problem. Smith's famous invisible hand doesn't exist.

The invisible-hand theory of Adam Smith holds that capitalists are like water, which flows wherever gravity takes it. If there is a need for a new kind of razor, one or more capitalists will flow into the razor business. If there is a need for a diet version of Coke, a company will flow into that market. At the bottom of this idea is a disdain for capitalists as greedy, cautious calculators who do no more than follow the market where it leads, doing immense good for society but only as an accidental result of the cold pursuit of their self-interest. In the view of the metaphysical supply-siders the modern obsession with econometric models is a consequence of Smith's mechanistic view not a contradiction of it. Econometric models envision capitalists responding, almost blindly, to predictable market forces.

"The prevailing theory of capitalism suffers from one central and disabling flaw: a profound distrust and incomprehension of capitalists," Gilder writes in The Spirit of Enterprise. "With its circular flows of purchasing power, its invisible-handed markets, its intricate interplays of goods and moneys, all modern economics, in fact, resembles a vast mathematical drama, on an elaborate stage of theory, without a protagonist to animate the play."

Gilder's paradigm is built not on markets but on entrepreneurs. It is a Great Man Theory for economics. Say's Law is at the base of the paradigm, but with a richer meaning. For the metaphysical supply-siders, the statement that supply creates its own demand is a denial not only of demand management in the Keynesian sense but a denial of the market's ability to evoke new products and services. What distinguishes the entrepreneur is not his ability to take direction from the market but his ability to lead it. The demands of the many who make up the market are infinite and undefined; the entrepreneur is the one who through his ability to sympathetically imagine the needs of the many gives their infinite demand a new, definite, and more efficient shape, defining a need in the very act of creating a product that fulfills it.

Henry Ford's Model T was not a mere reaction to demand: The demand to go from one place to another as quickly and cheaply as possible dates from the birth of man and knows no limits. Ford was an entrepreneurial genius because he saw that the price and configuration of the Model T would fulfill the transportation needs of the average American better than that average American had ever imagined. The market did not cause the Model T; it permitted it. Almost overnight the automobile was transformed from a toy for the rich into a necessity for all: Supply had created its own demand. Thus Gilder argues that the entrepreneur is not a tool of markets, but a creator of markets. He does not react; he imagines.

In practical terms then, the metaphysical supply-siders agree with standard supply-side policy recommendations but for subtly different reasons. They accept, for instance, the importance of low tax rates not only because high tax rates marginally lower productivity by reducing average incentives but especially because they may cripple a generation of entrepreneurs--the great men--whose contributions would otherwise advance the economy further and faster than any marginal average increase in productivity.

Whether it will prove useful in judging fiscal policy, Gilder's is truly a different paradigm, a different way of looking at the behavior of the economy. It means that Gilder is going to disagree with adherents of the old classical view (even with some supply-siders) on a number of fundamental issues, including the value of economic models, the reliability of forecasting and of statistical indexes of the economy, and the relative importance of personal tax rates and corporate tax rates. Readers of NATIONAL REVIEW and the Wall Street Journal and the Washington Times have been witnessing a debate over the relative merits of various tax-reform proposals. Gilder has argued that individual initiative is so important that a reduction in marginal rates justifies an increase in business taxes. Ture and Roberts argue that individual initiative is fatally disabled if the price of capital accumulation is too high. They conclude that the individual rate reductions aren't worth the price of substantially increased taxes on business.

These disagreements are important because, though they don't clarify the philosophical disagreements between different paradigms, they force different paradigms to compete in an arena in which we can learn who wins. If a tax-reform bill with high capital costs and low personal rates is passed, and the economy goes into a tailspin, we will have some reason to question Gilder's premises.

This, getting back to Kuhn, is how scientific paridigmatic disputes are settled. The broom-pushers decide who is right on the small issues, and then gradually determine who is right fundamentally.

That is what academic economists are doing right now. While it is true that few academic economists call themselves supply-siders, it is also true that hundreds of academics are looking into some of the specific questions suggested by the supply-side challenge. Part of the reason for this is that after fifty years of Keynesianism, PhD students were having trouble finding new dissertation topics. When supply side raises micro-economic issues, such as the effect of high marginal rates, and the effect of incentives, and when policymakers begin to act on those issues, students are willing to investigate.

More importantly, mainstream economists have grown insecure because of the failure of econometric models. After forty years of hubristic self-confidence in their ability to "fine-tune" the economy through adjustments in taxation, government spending, and money supply, mainstream economists are acknowledging their inability to accurately measure the economy, much less control it. "Macro-economic theory is in absolute shambles," William Niskanen, former chief of the Council of Economic Advisors told David Brock of Insight magazine. Humbled by the confounding experiences of the late Seventies and early Eighties, their responses to supply-side principles are changing from "That's ridiculous," to "Of course, we all know that."

"What happens is that the ideas get assimilated if they have survival qualities and people forget where they came from," says Alan Reynolds. "We're on the point of becoming conventional," says Wanniski, somewhat ruefully.

The same sort of nuts-and-bolts-level experimentation is taking place in policy circles. The supply-side tax-reform package was pushed through Congress by such men as Senators Robert Packwood and Robert Dole, and Representative Daniel Rostenkowski, and the legions of Capitol Hill economists, none of whom is a supply-sider. The Treasury Department is trumpeting the supply-side-influenced view that nations should coordinate exchange rates, when not too long ago, the prevailing wisdom was that international monetary problems a) can't exist, or b) if they do, they are fiscal problems, not monetary problems.

There doesn't seem to be a Gresham's law of economic discourse. Bad supply-side thinking doesn't drive out or discredit the good. Rather it opens up debate. By raising philosophical issues, and by making them politically attractive, the metaphysical supply-siders have given the broom-pushers something to look into. If mainstream conservatives can rip their gaze from the Soviet threat, they will find the war against materialism being fought on the economic front. It is an exciting, and turbulent time for economics. Supply-siders are leading the march for freedom, and hating each other every step of the way.